Mitch McConnell voted for the bank bailout

The Senate Minority Leader has been talking tough lately about how the best way to reform the financial sector is with just three words:  No. More. Bailouts.

Two main drawbacks to this Three Word Game:

(1) The collateral damage to the rest of the economy, notably the credit markets,  is likely to be huge if financial behemoths fail;

(2) Politicians and policy makers know that and will tend to choose a bailout over colossal damage to the economy, no matter what they say.

One such politician is the senior Republican senator from Kentucky, who voted for the financial bailout of 2008, along with 74 other senators.  (The party breakdown was 39-9 in favor among Democrats, 34-15 among Republicans.)

Senator McConnell, I call bullshit.

Shock therapy for the banks?

Thomas Friedman has a thought-provoking column in Sunday’s New York Times, titled “Time for (Self) Shock Therapy.”  Unfortunately, one of the thoughts provoked is “A lot of this is oversimplified,” but there are still some good ideas and some good exposition in it.  On the eve of the inauguration, Friedman suggests that President Obama’s first White House meeting should be with the presidents of the 300 biggest banks, and he should tell them there’s a new sheriff in town.  The first paragraph of Obama’s imaginary indictment of the bankers is nicely put, especially the heart metaphor:

“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. The banking system is the heart of our economy. It pumps blood to our industrial muscles, and right now it’s not pumping. We all know that in the past six months you’ve gone from one extreme to another. You’ve gone from lending money to anyone who could fog up a knife to now treating all potential borrowers, no matter how healthy, as bankrupt until proven innocent. And, therefore, you’re either not lending to them or lending under such onerous terms that the economy can’t get any liftoff. No amount of stimulus will work without a healthy banking system.”

Friedman then has Obama announcing a thinning of the herd, kind of like FDR’s bank holiday of 1933, whereby the healthy banks would be recapitalized and the sick banks liquidated:

An answer to the $700 billion question?

That question being, Why????

I’d figured the financial bailout was a combination of

(A) the reasonable (a finger in the dike to avert a systemic collapse) and

(B) the mendacious (Wall Street using its massive political clout to call in the feds to save it from itself and receiving a platinum parachute from the ex-Goldman Sachs boss at the top of the Treasury).

But buried deep in Michael Hirsh’s review of Niall Ferguson’s new financial history of the world is this nugget, which we shall call

(C) the hand that feeds us (Buck up, foreign investors!  Don’t pull your love out on us, baby):

“Indeed, it’s no secret on Wall Street and in Washington that the real targets of President Bush’s $700 billion bailout plan were the foreign funds, including “sovereign wealth funds,” that keep America’s financial system afloat. Unless these foreign financiers — principally China and Japan — get reassurance that the global financial system can function properly again, Ameri­ca’s long period of growth and power may be coming to a close.”

This has been the fear ever since the ’80s:  what happens when foreign investors decide it’s time to pull up their stakes in America?  Now that would be a harsh episode of “cut and run.”

For now, my new answer to the $700 billion question is “All of the above.”

Robert Shiller on the bubble and the bailout

A brief interview in Der Spiegel, from 7 October 2008, still timely.  Shiller says the policymakers’ biggest mistake was in failing to recognize or do anything about the housing bubble until it was too late.  Unfortunately, the interview does not include follow-up questions on what might have been done to gently deflate the bubble, but Shiller probably addresses that in his current book.  (I’ll post some words on that when I get it.)

Unlike most other economists I’ve read, Shiller actually kind of liked the initial bailout plan — i.e., for the government to buy up to $700 billion of toxic mortgage securities from banks.   Kind of:  “It’s like plugging holes in a sinking ship. You only have so many hours before the ship goes down. You can’t think about how the ship should be designed or nautical engineering.”  I wonder what he thinks of the revised plan for bank capital injections.